Key Points of Contract Evaluation
Your client is submitting a complete set of specifications together with his Request for Quotation or Invitation to Tender. Many of these specifications are general documents. Only a small part relates to your service. Nevertheless these documents might be relevant in identifying project risks. In early commercial stages, you find reluctance to go through all the specifications. You will have to identify the key points of evaluation. In this blog, I focus on how to evaluate the contractual tender documents.
Different types of contractual documents
Your client often distinguishes between “general terms and conditions” and “particular terms and conditions”. Besides that, he often has mentioned some terms and conditions in the scope of work or other project specific documentation. After getting a general overview of the project and the intentions of your client, you should look for three important topics; liability, Guarantee and Liquidated damages.
To what extend does your client wants to make you liable
Liability is a risk, which might harm the continuity of your enterprise. In case terms in liability are misjudged and your client is not willing to solve a possible issue in a descend manner, you might be facing bankruptcy. In young industries with a wide supply chain, clients are less caring about your well-being. When evaluating contractual terms, look for a cap of the liability. This cap is preferably a lot less than the contract value. Please note that your liabilities for damages in case of gross negligence and/ or willful misconduct can never be excluded. Most legal systems do not allow exclusion of these risks.
"Do not forget to check the liability clause in relation to your insurance policy."
Guarantees and Warranties impact your pricing
Many clients wish their supplier to provide warranty on items supplied or services delivered. This sounds reasonable, but please do not forget to check that the warranty and guarantees you provide are only for your goods or services. For example: In case you weld a pad eye to a skid and the skid and the pad eye are supplied by a third party, you should only be required to provide warranty for the welding work and not for the items supplied by third parties.
Liquidated Damages should be capped as well
When you supply a critical component or service, delivery time is just as critical as quality. To make you aware of this, the client includes the provision to charge costs to your account in case you are not delivering in time. The evaluation of these clauses should take place on what you think is reasonable. Many clients accept extra (optional) costs to have some kind of Liquidated Damages in the contract. The same Accounts for warranties and guarantees.
"Do not be afraid to offer Warranty or to accept Liquidated Damages paragraph at an extra optional line item in your proposal."